Collateral damage in the Shanghai Stock Market

As in anything in the financial industry, there are winners and losers, although you could not be faulted for seeing more of the latter recently in China than the former. The market was up last week slightly, as it seems to be starting to shaking off the downward trend. It may not matter though, as there has been serious damage done.

I was speaking with a friend last week and one of his employees was feeling down and not really engaged at work. After a bit of discussion and prodding, my friend found out that the employee had basically taken out a mortgage on their home and had put all of that money into a brokerage account. With margin trading he was able to significantly increase his returns...which was a good strategy, when the market was going up. But over the last two weeks, the market has gone anyway but up. About a week before, the brokerage closed him out of his margined positions and he eventually sold everything at a loss. A week later, the bank foreclosed on his apartment.

At one of the local gyms in Shanghai, all the talk was about one of the instructors. He had 'timed' the market well and over the course of two weeks earlier in the year, he had made enough money to buy a new car. In the previous couple of weeks, that money had evaporated, as well as the equivalent of two years of his salary.

A lack of trading experience and complete understanding of the risks has lead to one of the sharpest drops in the markets history. For naysayers, this is a perfect chance to say 'i told you so'. But the stakes here are much bigger than just pride. A collapsed stock market could wipe out a tremendous amount of spending power and cripple an otherwise limping economy.

It used to be that if you had the government on your side in China, you were in the clear, but it seems that even that isn't helping the SSE. This coming week will be critical to see if the rally or rout continues.